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Executives

Peter Schuman

Stephen Cumming - Chief Financial Officer and Vice President of Finance

Steven A. Laub - Chief Executive Officer, President and Executive Director

Analysts

James Schneider - Goldman Sachs Group Inc., Research Division

Blayne Curtis - Barclays Capital, Research Division

Steven Eliscu - UBS Investment Bank, Research Division

Craig Berger - FBR Capital Markets & Co., Research Division

John Nguyen Vinh - Collins Stewart plc, Research Division

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Brian C. Peterson - Raymond James & Associates, Inc., Research Division

Jeffrey A. Schreiner - Capstone Investments, Research Division

Sujeeva De Silva - ThinkEquity LLC, Research Division

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Atmel (ATML) Q2 2012 Earnings Call July 31, 2012 5:00 PM ET

Operator

Good afternoon. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Atmel Second Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Peter Schuman, Director of Investor Relations. Please go ahead.

Peter Schuman

Thank you, Christy. Good afternoon and thank you for joining us for Atmel's Second Quarter 2012 Earnings Conference Call. A copy of the press release issued today is available on our Investor Relations website. A replay of this call will be available after 5:00 p.m. Pacific today and will be archived for 48 hours. The webcast will be archived on the company's website for 1 year. Access information is provided in today's press release.

Joining us for the call today are Steve Laub, Atmel's President and CEO; and Stephen Cumming, Vice President of Finance and Chief Financial Officer. Stephen will begin the call with a review of our second quarter financial results, and Steve will then provide additional information on the business. At the conclusion of Steve's remarks, Stephen will discuss our financial guidance for the third quarter of 2012 and then open the call for questions.

During the course of this conference call, we may make forward-looking statements about Atmel's business outlook, including statements regarding our expectations for market growth, litigation matters and the anticipated course of patent litigation, revenue, target gross and operating margins, product introductions and cost savings for 2012 and beyond. Our forward-looking statements and all other statements that are not historical facts reflect our expectations and beliefs as of today, and therefore are subject to risks and uncertainties as described in the safe harbor discussion found in today's press release.

During the call, we will also discuss non-GAAP financial measures. The non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release. I would now like to turn the call over to Stephen Cumming for a discussion of our second quarter financial results. Stephen?

Stephen Cumming

Thank you, Peter. Let me provide some details of our statement of operations. The second quarter revenue of $368 million increased 3% as compared to our guidance of up 2% to 6%. This was primarily due to strong returns and improving revenue across most business segments during the quarter. As anticipated, second quarter marked the recovery in our core Microcontroller business. Second quarter 2012 gross margin was 44%. The second quarter gross margin was at the higher end of our guidance of between 43% to 44%. The non-GAAP gross margin was 44.6%. The majority of the sequential increase in gross margin was due primarily to higher factory utilization as a result of increased business levels versus the prior quarter. Our operating expenses of $137 million were at the lower end of our guidance of $139 million, plus or minus $2 million. This compares to operating expenses of $136 million in Q1 2012 and $136 million in the second quarter of 2011.

We continue to maintain strong discipline managing our operating expenses during the last quarter and the past quarters and with some recent restructuring activity as referenced in our press release, we expect greater operating margin leverage in the future. R&D expense of $66 million in the second quarter was flat compared to the prior quarter compared to $65 million reported in the same period last year. SG&A expense was $71 million for the second quarter of 2012 compared with $70 million in both the prior quarter and in the same period last year. Stock compensation for Q2 was $18 million and allocated as follows: $2 million to manufacturing, $6 million to R&D and $10 million to SG&A. Stock compensation decreased by $1 million compared to the first quarter of 2012.

Income from operations was $8 million in the second quarter of 2012. Second quarter income was reduced by $14.4 million for charges related to restructuring activities. The restructuring is primarily headcount reductions in Europe and in the U.S. that will result in annual savings of over $10 million in 2013. GAAP operating margin was 2.2%. This compares with income from operations of $25 million or GAAP operating margin of 7% in the prior quarter, which included a benefit of approximately $11 million from the release of reserves related to a previously established foreign government grant and income from operations of $111 million in the same period last year.

Non-GAAP operating income for the second quarter of 2012 was $43 million or 11.7% of revenue and excludes acquisition-related charges, restructuring charges and stock-based compensation, and represented an improvement from non-GAAP income from operations of $36 million in the prior quarter. Non-GAAP net income from operations was $126 million from the same period last year. GAAP income tax provision totaled $3.7 million in the second quarter of 2012, which is lower than our guidance of approximately $7 million to $8 million. The second quarter 2012 GAAP tax provision of $3.7 million compared to a tax provision of $4.3 million in the first quarter of 2012 and an income tax position of $18.8 million for the second quarter of 2011. During the second quarter of 2012, our non-GAAP income tax provision was approximately $1.8 million, which compares to $71,000 in the prior quarter. We expect to have non-GAAP or a cash tax effective rate in the mid- to upper single-digit percentages for the remainder of 2012.

GAAP net income for the second quarter of 2012 was $754,000 or break even per diluted share. This compares with first quarter 2012 net income of $20.4 million or $0.05 per diluted share and GAAP net income of $90.9 million or $0.19 per diluted share in the same period last year. On a non-GAAP basis, for the second quarter 2012, we have net income of $37.4 million or $0.08 per diluted share. This compares with non-GAAP net income of $35.3 million or $0.08 per diluted share in the first quarter of 2012, and non-GAAP net income of $124.3 million or $0.26 per diluted share in the second quarter of 2011. As to our stock repurchase program, during the second quarter, Atmel repurchased 6.1 million shares of common stock in the open market at an average price of $7.29 per share. Our planned totals to date for Atmel's $700 million buyback program instituted since the third quarter of 2010 are 56 million shares repurchased at an average price of $9.52, amounting to approximately $534 million.

Now, turning to the balance sheet. Combined cash balances, cash and cash equivalents of short-term investments totaled $246 million for the second quarter, representing a decrease of $53 million from the first quarter. The decrease is primarily related to the repurchase of common stock, utilizing approximately $44 million in cash during the second quarter of 2012. Cash flow from operations totaled approximately $8 million in the second quarter, down approximately $53 million from $61 million in the first quarter of 2012, due primarily to timing associated with new product ramps affecting linearity of shipments towards the end of the quarter.

Capital expenditures were approximately $9 million in the second quarter, up from the first quarter's $7 million and within the guidance range of $5 million to $10 million. Depreciation and amortization in the second quarter of 2012 was approximately $19 million, flat compared to last quarter and $17 million in the second quarter a year ago. Accounts receivable totaled $240 million at the end of the second quarter, an increase of approximately $35 million from the first quarter. Our days sales outstanding for the second quarter stood at approximately 59 days, up 1 week from the prior quarter. We continue to provide stringent control on oversight of our customer credit levels and AR balances and expect to see our DSOs return to lower levels in the third quarter. As expected, both the inventory dollars and inventory days decreased during the second quarter. Our second quarter inventory declined by $8 million to $349 million compared to the prior quarter's $357 million. Due to the actions we have taken, our days of inventory decreased by 4 days and stood at 154 compared to the first quarter's 158 days.

Now, let me turn the call over to Steve for a commentary on our business. Steve?

Steven A. Laub

Thank you, Stephen. As we anticipated, our Q1 marked the bottom of the cycle as our business grew sequentially during the second quarter. From an end market perspective, our largest end market, industrial, improved modestly during the second quarter after 4 consecutive quarters of softer sales. We also experienced growth in the communications and tablet e-reader markets, almost other end markets were generally soft.

Moving to a discussion of our business segments, our Microcontroller business units. Microcontroller revenue of $220 million increased 1% sequentially but was down 27% as compared to the second quarter of 2011. Our product family during the second quarter, our 8-bit microcontrollers grew 4% sequentially or down 29% year-over-year while 32-bit microcontrollers decreased 7% sequentially and decreased 21% year-over-year. An important highlight this past quarter was that our Microcontroller business, excluding touch, generated double-digit sequential growth as we saw increased revenue in all product lines and major geographies.

As to new products, in the area of ARM-based microcontrollers, Atmel recently announced that we are the first to deliver the industry's highest density embedded flash, Cortex-M4 processor with 2 megabytes of embedded flash. Atmel's Cortex-M4 processor-based MCU, includes best-in-class power consumption, offering a savings of over 50% from the nearest competitor. This our processor, the SAM4 ST 32, offers increased program memory, data storage and low power consumption and is the ideal device for industrial and consumer applications like wireless thermostats, GPS sports watches, Smart Meters and bar code readers. As mentioned last quarter, Atmel plans to quadruple its Cortex-M3 and M4 series processor portfolio to nearly 200 ARM processor-based MCUs, which include devices with higher on-chip memory densities and extensive peripherals.

During the second quarter, we became one of the first companies to achieve ZigBee-certified product status using ZigBee Light Link certification, a new industry standard would start the design of easy-to-use consumer lighting and control products that will give users the ability to wirelessly control their LED fixtures, lightbulbs, timers, remotes and switches within their homes or businesses. Atmel has achieved a ZigBee Light Link reference design for their ATmega128RFA1 wireless MCU, making it the benchmark against which future ZigBee-certified products designed to this standard will be tested. Our wireless microcontrollers allow engineers the ability to manage multiple lighting devices on a single network. The ZigBee Light Link reference implementation can also be used seamlessly within Atmel's LED drivers for color mixing, system management and advanced dimming in commercial, industrial or architectural solid-state lighting applications.

Also introduced this quarter was a new ZigBee RF Transceiver which offers 60% lower power than the nearest competition. It is ideal for battery-operated wireless applications such as gas and water metering, monitoring and control systems and energy harvesting equipment. For a complete solution, a design engineer can use the transceiver for one of our low-power, high-performance AVR or ARM-based microcontrollers as a companion chip.

A key growth area for our Microcontroller business is battery management. We are presently selling 2 new automotive microcontrollers with intelligent sensing technology measuring a battery's voltage, current and temperature. The new Atmel MCU supervised the state of charge and battery health of 12 volt-standard lighthouse batteries, using start-stop systems, enable the increased use of new Lithium-Ion batteries, which can help improve a vehicle's energy, efficiency and reduce its CO2 emissions. As a reminder, Atmel participates in the automotive market through product developed at both the microcontroller and RF and Auto segments.

Also in our 32-bit Microcontroller business, during the second quarter, Atmel began shipments of our first sensor hub products. The sensor hub is a microcontroller linking together the ever-increasing number of sensors found in electronic devices such as smartphones and tablets. Examples of these sensors include gyroscopes, accelerometers and net magnetometers. Combining the management of sensors into a dedicated sensor hub processor eliminates the need to wake up the applications processor to perform these functions allowing for significant reductions in power consumption and improved battery life, while also reducing latency and improving responsiveness.

A standalone sensor hub manager is becoming a preferred approach for specific classes of smartphone and tablet designs. Expect to see our sensor hub processor in leading OEMs' products by the end of this year. Regarding our developer ecosystem, this past quarter, we fully released Atmel Studio 6, a leading edge integrated development environment that for the first time supports both our industry-leading AVR products, as well as Atmel 32-bit ARM Cortex-M processor-based microcontrollers. This is an exciting milestone for Atmel as we are delivering on our customers' desire for a single robust platform supporting these 2 powerful architectures.

When it comes to microcontroller selection, the ecosystem, that is all of the related tools and software, is as important as the device itself, according to a recent embedded market survey by EETimes. Downloads of Atmel Studio 6 have been very strong. Second quarter download activity exceeded the highest quarterly download activity of any prior studio release. With a full production release in May, we experienced a record number of downloads. Total downloads of over 120,000 in the 2 months since production of Studio 6 is 30% higher than any previous 2-month download number for any prior release.

Atmel continues to build relationships with the developer community with our support of Arduino, an open-source electronics platform which features Atmel's AVR microcontrollers. Microcontroller designers of all ages have an easy-to-use and affordable path to get their projects started quickly using Arduino's development boards for artists, designers, hobbyists, anyone who wants to build a project based on a simple platform. At the end of June, Google, at their Developers Conference, announced an Arduino development board with Android accessory development kit, containing numerous Atmel devices, including our 32-bit Atmel ARM Cortex-M3 processor as the main control running a USB on the go Bluetooth stack, audio streaming, NFC and Android accessory protocol and our capacitor touch controller for buttons, sliders and wheels for volume and LED current control.

Moving to our touch products, in the handset market, we continue to expand our product portfolio for handsets. Our S Series is experiencing widespread customer acceptance with our customers' first products available in the market this quarter. Some recent major smartphones released in the market using maXTouch include HTC's One S and Nokia's new 808 PureView, which features a 38 megapixel autofocus camera. Other recent smartphones incorporating maXTouch technology includes Samsung's Maestro, Mandel, Minuet and Jaguar; Motorola's DEFY, XT535, DEFY PRO, RAZR V XT889 and ATRIX TV XT682; Fujitsu's Raku-Raku; Huawei's Ascend D1; Lenovo's K800 and ZTE's V8000. We have multiple smartphones released from Kyocera, BBK Communications, KME Communication, OPPO Electronics, Pantech and Yulong's Coolpad.

In the marketplace for tablets and other large-screen devices, as many of you are aware, we're the leading supplier of touch controllers for non-Apple tablets and other large-screen devices. Some recent major tablet introductions utilizing maXTouch included Acer's Iconia A700, Lenovo's IdeaTab S2, Toshiba's Excite and ZTE's T98, V9A and V11 tablets.

In the past year, the market for media-based tablets has grown rapidly and now account for over 1/2 of the Android tablets shipping today. This is a new market for Atmel and we have already begun to establish a significant presence. October 26 marks the widely anticipated launch of Microsoft's Windows 8 operating system. This operating system is built for Touch as the primary interface between people and machines and Touch is expected to penetrate beyond tablets into more traditional PC products such as Ultrabooks and notebooks. As a leading engineering partner with Microsoft for Touch and Windows 8, we have been working closely with them and leading PC OEMs in preparation for the Windows 8 launch. Zone activity for Windows 8 has been robust. We look forward to providing a comprehensive list of design wins once these products are commercially available in the marketplace.

Recent figures from NPD DisplaySearch indicate that tablet and notebook shipments will grow from 347 million units in 2012 to over 809 million units by 2017. The tablet shipments surpass the notebook shipments by 2016. In May, Intel stated that of the 110 Windows 8 models that were seeing [ph] adoption this holiday season from OEMs, 30 are expected to be Touch-enabled. Clearly, we are excited about the market opportunity that large screens offer for maXTouch. We continue to be the leading supplier and innovator in this space.

Our 1664S product is winning numerous winning designs in the market for screens up to 12.5 inches and Atmel is presently sampling a new maXTouch S Series touchscreen controller solution, the 3432S, for larger screens Touch-enabled Ultrabooks and notebooks. The 3432S is designed for Windows 8 touchscreens up to 17.3 inches. This is the highest capacity of note down products commercially available. It features our patented noise new technology to ensure robust performance with various chargers and noisy environments. Our technology allows the use of thinner and lighter touch sensors, but do not require an extra layer of ITO for shielding, thereby reducing thickness and cost to help system designers create thinner and lighter Ultrabooks and notebooks. Production quantities of this new touch controller will be available this quarter.

With respect to Windows 8, Atmel has close working relationships with NVIDIA and QualComm. We have extended our relationship with QualComm on new smartphone and tablet development platforms to accelerate developers' ability to create a rich touch experience on new Windows 8-based devices. The joint developed platforms combine Atmel's leading maXTouch S and E Series touch controllers with Qualcomm's popular high-performance, low-power Snapdragon processor for smartphone and tablet designs. Our sought partnership with NVIDIA continues with maXTouch support for their latest Tegra platform for both tablets and handset designs.

In new markets beyond handset and tablets, we are continuing to see the proliferation of touchscreen controllers. In the industrial market, touch is being adopted in such verticals as point-of-sale terminals, home and building automation, medical equipment, white goods and others. We announced in May that Ingenico, a world leader in payment solutions, selected Atmel's maXTouch for a series of portable payment terminals with touch capability. The new Ingenico terminals are the most compact touchscreen-based systems in the market, delivering advanced audio, video and touchscreen functionality. Merchants can now build a full portfolio of applications and services in terminals, taking advantage of the easy-to-use touch interface and full-featured multimedia functionality. This design confirms the continued evolution and expansion of touch into more and more aspects of everyday life.

Signifying the breadth of touch adoption across other vertical markets, one of Atmel's largest screen industrial customers, Ocular LCD, received a Best in Show Award at the Society for Information Display's International Symposium in June. Ocular's crystal touch product featured Atmel's 1716 E touch controller for screen sizes up to 17 inches. This award is further testament to the importance of capacitive touch in new markets, and our understanding of market needs and ability to provide innovative touch solutions.

In the automotive marketplace, we have major wins with leading tier 1 automotive suppliers and OEMs for capacitive touch. For example, a large North American, high-volume luxury car manufacturer chose for the center stack display to incorporate both maXTouch as well as our Touch and buttons, sliders and wheels for replacing mechanical buttons. Our fully automotive qualified products started shipping in the second quarter to this OEM and we expect this new vehicle available in the market within the next few months. Design win activity for maXTouch in the automotive market continues strong. This is the first year we expect production revenue for automotive in Touch and we just had a starting point for this business. As a reminder, larger-screen designs offer a significantly higher average selling price than handsets.

For capacitive touch and button sliders and wheels, the screen capacitive sensing is continuing to venture out of just consumer space into more industrial markets. We expect total clients [ph] will be a strong revenue contributor in the coming quarters followed shortly thereafter with complementary support from the automotive markets. Industrial controllers are adopting this more modern user interface as their customers are demanding it. The new features that Atmel has released, including haptics and proximity detection, are driving force behind this success.

XSense. In April, Atmel unveiled its revolutionary new and unique film-based touch sense product called XSense. As a reminder, XSense is based on proprietary, fine line metal mesh technology and is a high-performance alternative to traditional touch sensors most commonly used today. Last quarter, we mentioned we were sampling XSense with customers and the response to date has been very positive. We are on schedule for qualification of the product this quarter and for production to start during the fourth quarter of this year. I'm pleased to report, we have already received our first commercial order for the XSense product. We are presently working with several large OEMs on new designs and expect first products to be released into the marketplace during the first half of 2013. Major volumes are expected to ramp in the second half of 2013.

Turning the discussion to our Non-Volatile Memory segment. Total revenue was $47 million in the second quarter, down 1% sequentially and down 34% as compared to the second quarter of last year. This small sequential decline in the memory business was a result of older legacy terminal flash products being at the end of their product life. We recently introduced 2 new families of zero EEPROM products. The first series, the 24808024 mac series of devices provide preprogrammed media access control, which is a unique identifier assigned to network interfaces for communications on the physical network, alleviating the need for customers to program their own identity addresses and maintaining associated complex databases, making it simpler, faster and less expensive to develop Internet-connected products of all types. The second series, 8024CS series of devices, include the factory program read-only serial numbers that can help customers simplify entire control of mass production mines and enhance product traceability. The devices can be used in a variety of different market segments, including Internet-connected devices for consumer, white goods, industrial, medical, communications and other applications. The new devices are dropping comparable with existing Atmel serial EEPROM devices.

In the RF and Automotive segment, revenue improved to $48 million in the second quarter of 2012, up 9% sequentially and down 10% as compared to the second quarter of 2011. We had a healthy pickup in both our high-voltage [indiscernible] and product lines during the second quarter. Our non-automotive portion of business, including Identification and our Legacy Foundry business also grew in the second quarter after a softer Q1. With our car access products, we are making inroads in the Japanese automotive market and our next-generation [indiscernible] are in early staffing phase to lead customers.

Moving to the ASIC business segment, second quarter revenue at $53 million was up 9% sequentially and increased 1% compared to the second quarter of 2011. This is primarily due to higher revenue in the aerospace and custom parts for medical and point-of-sale applications. During the third quarter, we expect this segment to experience a significant slowdown, primarily due to the European Aerospace business being adversely impacted by government funding delays and changes concerning export controls for products shipped from Europe to Asia. We expect this business will rebound to more historical run rates in the fourth quarter.

As to new products, our French subsidiary has used the industry's first radiation-hardened, high-performance aerospace microprocessor to be reconfigured on-the-fly to accommodate ongoing design modifications of satellites, including specification updates, in-flight adjustments during trial flights and postflight alterations.

Looking at the second quarter revenue by geography, our largest shipping location was Asia, representing 54% of revenue compared with 57% in the prior quarter. EMEA remained flat sequentially at 28% of revenue, while the Americas improved to 18% of revenue as compared to 15% of total revenue in the prior quarter.

In summary, we are pleased to see a double-digit rebound in our core Microcontroller business from the second quarter and we are well-positioned to continue top line growth for our Microcontroller business for the remainder of the year. Our maXTouch business, while softer in Q2, is solid and new design wins continue to be very robust. However, we do not expect to achieve our previous forecast of maXTouch revenue of over $335 million this year and are likely to be approximately 10% to 15% below this forecast as lower handset sales at our largest handset customer are not being sufficiently made up by maXTouch sales to other customers.

Despite the global market uncertainty and recent softening in the handset market, the anticipated launch of Windows 8 and growth in new markets should drive our maXTouch business to strong sequential growth in both the third, and in particular, the fourth quarter of this year. There has been much ongoing uncertainty in the global economic environment due to the financial situation in Europe and the recent slowing in Asia. For Atmel, our bookings remain strong for the end of the second quarter until weakening into July. Lead times remain low and visibility remains limited. Now, let me turn the call back to Stephen for our Q3 financial guidance. Stephen?

Stephen Cumming

Thank you, Steve. For the third quarter of 2012, the company expects revenue to be between $357 million and $379 million, primarily as a result of the lower revenue from our ASIC business, which we expect to recover in the fourth quarter. We expect GAAP gross margin to be between 43% and 44% in the third quarter of 2012, due primarily to lower levels of our ASIC Space business, which carries a higher gross margin than the company average and also due to the lower fab utilization than previously anticipated. On a non-GAAP basis, model to 43.5% to 44.5% gross margin for the third quarter.

Regarding our long-term GAAP gross margin target of 54%, while the operational initiatives are in-place to achieve this goal, due to the slower-than-anticipated global economic recovery and lack of snapback in the semiconductor industry, we now expect to achieve our long-term target exiting 2014. Third quarter GAAP operating expenses are expected to be approximately $133 million, plus or minus $2 million. Non-GAAP operating expenses are expected to be approximately $116 million, plus or minus $2 million. As a result of the recent restructuring activity announced today, going forward, we expect greater operating margin leverage.

For the third quarter, depreciation and amortization is expected to be approximately $20 million and stock compensation to be approximately $90 million. We expect capital expenditures to be approximately $10 million to $15 million for the quarter and between $35 million and $45 million for the full year. Other income expense is expected to be approximately $2 million expense and Quantum and ADD Semiconductor acquisition-related costs are expected to be approximately $2 million for the quarter. We expect our Q3 GAAP tax expense to be approximately $11 million to $12 million. For those doing non-GAAP tax models, we expect the non-GAAP or cash tax rate to be in the mid-to-upper single-digit percentages in Q3 and for the rest of this year. For modeling purposes, assume a GAAP fully diluted share count of approximately flat and approximately 447 million for non-GAAP share count. This concludes our prepared remarks. We'll now open this call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of James Schneider with Goldman Sachs.

James Schneider - Goldman Sachs Group Inc., Research Division

Steve, I was wondering if we could start out on the Touch side for a second, talking about not being able to hit the $375 million target you previously outlined. Can you talk about, in Q3 and Q4, what areas you expect to grow within the Touch category? Was it at more smartphones or more tablets in Q3? And then when do we expect first revenue from Windows 8?

Steven A. Laub

James, this is Steve. We expect that for both Q3 and Q4, the vast majority of the growth in our Touch business will come from tablets actually. And in fact, we expect also in the Q3 timeframe that we will start seeing some volume coming from Windows 8 projects that will be shipping in Q4. But the bigger ramp actually occurs in the Q4 timeframe.

James Schneider - Goldman Sachs Group Inc., Research Division

And then as a follow-up, Stephen I think you talked about a gross margin outlook exiting the year of about 48%. Do you expect to still hit that target or not?

Stephen Cumming

Yes, I think as we indicated on the earlier prepared remarks, that our overall utilization and the overall trajectory for revenue growth and the macro concerns are having a slower recovery for us in the industry. So it does mean that our overall utilization will be lower than what we had previously anticipated compared to our last call. So that will create a little bit more of a headwind for our gross margin trajectory. So I would say for Q4, exit rates are going to be more between sort of on a GAAP basis, somewhere between 45% and 46%.

Operator

Your next question comes from the line of Blayne Curtis of Barclays.

Blayne Curtis - Barclays Capital, Research Division

Maybe just a first question. I'm trying to understand the magnitude of the decline, did the Touch business come in weaker than you expected in June and what were the causes for that? And then if you could just comment also on the magnitude of the expected decline in ASIC, that'd be helpful.

Steven A. Laub

With respect to Touch business, it is a little softer in the quarter we just completed than we expected, primarily in the smartphone area, I'd say. And then this particular quarter, probably a little bit softer than we had anticipated also in the tablet area than again previously forecast, from both tablet and smartphone for Q3. And I think we're seeing -- you see generally in the marketplace, smartphones, while growing rapidly, are growing actually at a slower pace and than people have previously anticipated. And then we also had a particular design loss going back to the first quarter that we thought we'd be making that up with respect to other smartphone and then tablet sales throughout the rest of the year. But business has been a little bit softer than what we had anticipated. So we think it's the right time to update that forecast and to communicate that to the street.

Blayne Curtis - Barclays Capital, Research Division

And maybe just on the magnitude, the decline in the ASIC business and then kind of along with that trying to understand the gross margin guidance. I mean that would explain some of it but where are your utilization rates going to be to contribute to the down gross margin?

Steven A. Laub

On the ASIC business, the magnitude of decline, we're actually going to see that business overall decline this quarter, we think sort of low 20% sequentially, in the low 20s sequentially. So [indiscernible] decline in that business primarily due to what's happening in the more aerospace part of that business and it's for the reasons described in our prepared remarks. We're seeing a lot of those programs go into government programs, satellite programs where there has been a delay in those programs, we think due to a lot of things related to problems in Europe and the government spending and government programs because of that related to financial issues. And then there's also some changes occurred with respect to export on some of those products outside of Europe. So big impact in Q3. The customer told us they expect that that will be a Q3 phenomena and expect to return to their strong called run rates back in the Q4 timeframe. And then with respect to the fab utilization, obviously that doesn't affect the fab directly but the overall business environment, I think for everybody in our industry, is softer than anyone anticipated if you go back 3 months, and we anticipated a stronger environment in the second half of this year than we're experiencing. And so our plans were to wrap the fab back up stronger than what we're doing today. So we'll be running the fab probably somewhere in the sort of mid-to-high 70s utilization. We had earlier anticipated running closer to the mid-to-high 80s in the Q3 timeframe. So that has an impact obviously on the gross margin.

Stephen Cumming

And just to add to that, Blaine, we don't really see that changing terribly much for the whole of the second half. So that's, as Steve said, that's creating more of a headwind for us.

Operator

Your next question comes from the line of Steven Eliscu with UBS.

Steven Eliscu - UBS Investment Bank, Research Division

First question on touch. With regards to the larger screen sizes, especially with Ultrabooks, Intel's going to move to Haswell processor next year and we see evidence that there's some new entrants just along from Taiwan coming in. How do you gain confidence that you can take your early advantage in the Windows 8 market to be able to create some more sustainable advantage next year?

Steven A. Laub

There are a number of people who -- I think every time there's a new entrance into this marketplace, and especially they come out of Asia, there has been, I think, a lot of speculation about the staying power of some of these people. There was first Kindle Fire product that was company called Imotech which was the first controller used of there. And that created a lot of activity by the Street, a lot of concern. I think we haven't heard much from that company since that timeframe. Secondly, most recently, there was a Taiwanese solution used in the newest Google Nexus tablet that just recently came out. We've also heard some reviews on that from a touch standpoint but they are actually rather negative. So we don't think actually -- despite the fact there's a lot of new competitors from Asia and new competitors also from North America, there actually hasn't been, with the exception of one company in Korea, anyone who's established themselves in a particular fashion. And so while I think there will be a lot of new entrants because I think it's in the nature of the business, our expectation and our intention is we're investing very heavily here. We think this is going to be a huge upsize in the marketplace and our intentions continue to drive for both high performance, as well as low-cost to achieve a very strong position. We have a very strong position today, both through the combination of the fact that we are early into the Android tablets a year ago. We believe our market share is north of 60% in the larger screen form factors and we continue to actually do to maintain and grow that share. So it's really just an appreciation of knowing what -- executing hard and that this is an area that we put a lot of resources and will continue to put our resources into.

Steven Eliscu - UBS Investment Bank, Research Division

Just looking at the non-touch microcontrollers, if we look at the numbers for last quarter and then go back to, let's say the late Q4 of 2009 or Q1 of 2010, it seems like you're at similar levels and of course, we've had a lot go on since then but we did have a big growth year in 2010, yet it does not appear your core non-touch Microcontroller business, at least the quarterly run rates, have significantly grown over that time period. Just trying to reconcile how we've thought of you as a share gainer and maybe not understanding some of the changes and underlying demand. Maybe you could sort of help us where you've had perhaps some changes in the market where you've lost out on some things and then help us understand the growth profile of that business going forward.

Steven A. Laub

Actually, you go back to the timeframe, I think you'll find that in 2010, we were a significant share gainer in the marketplace. I think that in 2011, I think one of the things that occurred was obviously, our Asian business tended to stop a little bit more perhaps than they should have. And so when the slowdown occurred in the industry, working down those inventory levels adversely impacted and slowed down the recovery in their business, I think, in 2011. But I think overall, the numbers, you put the close to 2 years together, or you'd see how we've done for the recent quarter, with double-digit growth of that business, I think you'll find that we are clearly a share gainer in this marketplace except for maybe a couple of quarters. [indiscernible] as I do see they're working down some of their inventories.

Steven Eliscu - UBS Investment Bank, Research Division

And just how much was the channel inventory lowered last quarter?

Steven A. Laub

The channel inventories are now pretty steady at about 10 weeks.

Steven Eliscu - UBS Investment Bank, Research Division

So they did not come down.

Steven A. Laub

No. But that's actually where we -- that's actually where pretty much I think they should be at. So they had been actually as high as over 12 weeks if you go back a couple of quarters and then it came down dramatic substantially in Q1 and they've held pretty steady at about 10 weeks in Q2. So now, I think you're seeing that they're -- you're seeing now with shipping out is consistent with consumption.

Operator

Your next question comes from the line of Craig Berger with FBR Capital Markets.

Craig Berger - FBR Capital Markets & Co., Research Division

I'm looking at the OpEx, which is pretty far away from the model that you gave of 29% of sales GAAP at your Analyst Day. What's the plan to get back in line with that model? I do see that guidance is for lower OpEx but I'm just wondering if it's enough.

Stephen Cumming

Craig, this is Stephen here. So you'll see, you heard from the prepared remarks that we did take some restructuring activity, which impacted both U.S. and Europe payroll. And that's going to start to materialize next quarter on Q3 and into Q4. And we should see the majority of those savings come out by the end of the year. So you are going to see, for the rest of this year, a reduction in our overall OpEx. So we guided Q3 to be $133 million plus or minus $2 million. I think you're going to see that in Q4, that will come down by a further roughly about $3 million, I anticipate, as a result of these additional restructuring efficiencies that we put in place. So we will enter the year, 2013 at much lower rate and we'll continue to be very cautious in terms of how we're spending our OpEx dollars and be very focused on the R&D investment. You've seen us take quick reactions to control spending and nice discretionary spend. I think you'll see that trend continue as we go to 2013.

Craig Berger - FBR Capital Markets & Co., Research Division

And then secondly, can you just help us understand, you said touch down 10% to 15% relative to your 375 forecast. What are you assuming for Win 8 related contribution in Q4? And can you also just update us on the status of your in-cell development efforts?

Steven A. Laub

So with respect to Win 8, we have a lot of design activity going on there. And as I mentioned, we're beginning shipments in Q3 for that. We expect a much stronger acceleration in Q4 with respect to that. We don't give out a specific number and I think there's actually a lot of uncertainty. We're very -- I'd say or a variability about where we will be. There is no doubt that one of the customers on the Win 8 programs and they're shipping the Win 8 programs but the absolute levels of those, they're still giving us ranges as to what the requirements are. So it's a little early to give you an exact number for that. With respect to Intel, we do recognize or we do believe that in-cell will be a way of delivering solutions in the touch marketplace. We've mentioned previously that we have in-cell in development here. We have that working with several display manufacturers in Asia and the timing of our in-cell development consistent with their expectation of market adoption is that sufficiently ahead of the marketplace. But we don't expect to be bearing any sort of adverse market acceptance or market position when in-cell is finally adopted in the marketplace. So we feel very good actually about where we stand in in-cell development.

Operator

Your next question comes from the line of John Vinh with Pacific Crest.

John Nguyen Vinh - Collins Stewart plc, Research Division

Just a follow-up on the revised maXTouch outlook for the year, you had talked about kind of weak smartphone demand. How much of the revised guidance was kind of revised lower demand for tablets versus smartphones? Or was it mostly smartphone-driven?

Steven A. Laub

It's mostly smartphone driven. What we're saying is some of the legacy, I'd say, earlier smartphone programs and so forth, what's happening is the smartphone cycle I think is I think faster today than it used to be. And so new programs are going to ramp faster and older programs tend to, I say, end faster, I would say, as well and I think what we're seeing is that the overall market is a little bit softer right now as what we're being told by our customers, than they've anticipated. There's a lot of consolidation going on in the marketplace and it's become more of a duopoly in the marketplace. So it's really much more of a smartphone issue than it's a problem in the tablet side.

John Nguyen Vinh - Collins Stewart plc, Research Division

And you mentioned you expected maXTouch to be up in Q3. Do you also expect smartphones to be up for you in Q3 as well?

Steven A. Laub

Let me double-check. our expectation right now is for Q3 is that tablets will be up, smartphones will be relatively flat. Those are again from a dollar standpoint.

Operator

Your next question comes from the line of Chris Caso with Susquehanna.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

I wonder if you could just verify what you're seeing in the non-touch portion of the Microcontroller business as you go into the third quarter. Do you expect that to be up as well? Can you give some color on some of the various market segments that you're seeing there? Obviously, we've heard some weakness from some others in that space.

Steven A. Laub

So in the core microcontroller segment, as I mentioned, we were up -- I'll give you more clarification. We were up in sort of low double digits in last quarter for that business. Our expectation is that this quarter, that business is probably going to be sort of essentially flat with respect to Q2. We had expected it to be up single digits earlier but we are seeing some softness in that. And interestingly, we had seen -- industrial is the largest end market for that business and industrial had its first up quarter in over a year this past quarter and not surprisingly, we also saw growth in our core micros. We're seeing weakness again in the industrial segment so it turned out [indiscernible]. Looks like it's turning back down based on the backlog that we're seeing. So for that reason, right now we're saying essentially flat.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

And just as a follow-up to that, did you have any commentary on automotive market as well?

Steven A. Laub

Automotive for us is also -- our expectation is we'll probably be down a little bit for say low single digits sequentially.

Operator

Your next question comes from the line of Hans Mosesmann with Raymond James.

Brian C. Peterson - Raymond James & Associates, Inc., Research Division

Brian Peterson stepping in for Hans. Just on the updated maXTouch guidance. How much of that was demand- or unit-related and were there any assumptions made to ASPs for that?

Steven A. Laub

I'd say it's probably both. I mean I'd say that it's demand related with respect to the reasons I gave you, which we're seeing a bit softer smartphone demand than we had expected. Also, ASPs have been coming down in that business. It's no surprise to anyone. They've been coming down in that business. I guess no surprise for anyone. They've been coming down over the past year. But that's been coming down more rapidly than we expect and we see the [indiscernible] used, but it's also been consistent with our expectation. So in that respect, we had modeled most of the ASP erosion. So it's really much more of a demand in unit than is ASP.

Brian C. Peterson - Raymond James & Associates, Inc., Research Division

But you actually expect ASPs to be up sequentially in the third and fourth quarter?

Steven A. Laub

They will be up for us but primarily due to mix, not so much due to a given product.

Operator

Your next question comes from the line of Jeff Schreiner with Capstone Investments.

Jeffrey A. Schreiner - Capstone Investments, Research Division

I was just trying to look at the inventory level. You might have commented on this a little bit. But last year, June was up. This year, it's kind of gone down in June. What type of a ramp are we really going to be expecting in the second half given that kind of dynamic on a year-over-year basis?

Stephen Cumming

You're referring to internal inventory in June?

Jeffrey A. Schreiner - Capstone Investments, Research Division

Yes.

Stephen Cumming

Yes, so overall, our internal inventory, we have been working that down over the last few quarters. In Q2, we reduced it by a further $8 million, which would bring us to about 154 days, down from 158. I think in Q4 last year, we were somewhere around 173. So you can see, it's coming down. We are working towards our target model of somewhere between 120 and 130 days and the plan is to work it down continually over the next several quarters. We are trying to balance that with some of the Windows 8 product ramps. So you might see in Q3 to support that, there's a slight increase but you'll see it then fall off a little bit in Q4 and, as I say, getting towards 120 to 130 days as we go into 2013.

Jeffrey A. Schreiner - Capstone Investments, Research Division

Just a quick follow-up. You talked about XSense and gave us an update there. But Steve, what are some of the initial end markets that are probably looking at this technology or maybe some of the first to market with this technology?

Steven A. Laub

The markets for this are very similar to the markets for the maXTouch product, both phone and tablets that I actually expect the mix to be much higher on tablet-type of products for larger screen because advantages of XSense are much more compelling, both from a performance standpoint, as well as a cost standpoint. So we expect to be in both marketplaces predominantly, initially but more larger screen versus small screen. We're also seeing a lot of interest in the sort of industrial automotive markets, because this allows them to do things with cursors and so forth that they aren't able to do today.

Operator

Your next question comes from the line of Sujeeva De Silva with ThinkEquity.

Sujeeva De Silva - ThinkEquity LLC, Research Division

In terms of the movement in the ASIC business, I'm wondering if the take or pay agreement you have remaining in Europe is impacting there and forcing you to build more inventory than you want given the movement in demand there.

Steven A. Laub

With respect to that, the take or pay is, and I think we've mentioned that before, we are building a little bit -- we're building ahead of some inventory for products because of the fact we have take or pay. So inventory is a little bit higher for us would have. And I think that's no surprise from that. Specifically, however what's happening on the ASIC business is predict the quarter, those 2 things are not necessarily connected in that regard.

Sujeeva De Silva - ThinkEquity LLC, Research Division

And then in terms of the larger screen, sounds like you're doing well there. But is there a situation here where it's multiple chips than higher ASP that consolidates into a single-chip over the next 1 or 2 years understand that trend is [indiscernible]?

Steven A. Laub

Yes, I mean right now, in our larger screens, in certain formants or certain screen sizes we are offering and customers using single-chip solutions to sell our 1664 is a single-chip sort of up to 12.5-inch Windows 8-compatible or certified chip. And so it handles all tablets and so forth. When you go above 12.5 inches, say for example, a 3432, that is a multi-chip solution. And so some of the laptop-notebook solutions will be a multiple-chip solution initially. And they will eventually, I'm sure you've all heard integrate into a single chip solution. However, the type of change that we saw when you think about 2011 going into 2012, where we had 4 chips going into 1 chip, I think what you see more now is 2 or 3 chips going into 1 chip and there'll be a constant -- it'll be a much smaller percentage of the total will be that multiple chip as compared to single chip. So the same kind of change with respect to revenues and impact, I don't expect in the future because of that.

Sujeeva De Silva - ThinkEquity LLC, Research Division

Last question, in terms of Samsung, what kind of continuity you're expecting there in Touch given the challenge and Galaxy S3? But are you expecting the other wins and is there a chance you're assuming recapturing some of that content or holding your tablet content? I just want to know the assumptions are in your updated guidance for touch.

Steven A. Laub

With respect to updated guidance, we continue to win designs at Samsung. Obviously, that was a major design and so the loss of that was particularly harder felt in that regard. But we believe our relationship with Samsung and our continuous design activity is very good right now. And clearly, we want to make sure that as we move to the next generations, we're surely targeting the large programs there as well.

Operator

Your next question comes from the line of Raji Gill with Needham & Company.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

On the lower maXTouch forecast, you talked about some share loss at one of your key OEMs. Are you seeing share loss at other handset OEMs? And can you maybe talk about the ASP situation? There are some Asian touch controller suppliers that are popping up now that are talking about 20%, 30% lower ASPs than the U.S.-based touch controller suppliers. Maybe if you could elaborate on that if that's what you're seeing as well.

Steven A. Laub

One thing that we've communicated consistently over the last couple of years is our initial ramps with maXTouch, a lot of the first smartphones that came out of Android, whether they're operated by -- regardless of who's offering it, that we are often the only supplier in those accounts. And so there was a move to diversify over the last 1.5 years. And so that has impacted our business otherwise than what would have been. So that has impacted that. That is something that we inform The Street consistently over the last 1.5 years. With respect to some new suppliers with lower ASPs, I would say in the smartphone area, we are seeing that. It's really more on the lower end of the smartphones. So I think the guys who are selling into the lower-end smartphones, we're just trying to gather the marketplace as the feature phones are covering all the lower smartphones. I would say that the real low ASPs is really an uptick area, and that's where I think there's really much more of a battle going on. We don't tend to participate nearly as much particularly in that part of the marketplace.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

And Stephen, on the gross margins being pushed out, exiting 2014, how should we look at the margin profile there? The volume levels have obviously come down. There are a lot of puts and takes. How should we think about the margin profile in '13? Are you seeing the pushout of that longer-term target due to because of lower maXTouch forecast that you baked into your own internal model and since maXTouch have higher margins, therefore you're pushing out that margin target? Can you talk a little bit about that in 2013, please?

Stephen Cumming

Yes. So I think it's worth mentioning that assuming that there is an ongoing steady recovery, you should expect to see gross margin improvement as we go through 2013. Clearly, when we set our targets to get to 54%, we were expecting revenues to get at and possibly higher than what you've seen from our last peak, when we were somewhere around 51%, 52% gross margin. And so assuming that we see continued growth in revenue, you should expect to see ongoing improvements in gross margin. Obviously, we expect that our overall Touch business as a whole, to grow faster than the other aspects of our business, which is a higher gross margin than the company average. That will be a contributor for the longer-term. And then as I said in the prepared remarks, that we do have a lot of other operational initiatives that we expect to start to kick in, during 2013, but a large portion, more to the back end of 2013 that helps improve our gross margin as we go into 2014.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Just one last question on that. I mean the peak levels that you're assuming in terms of revenue was in the range of kind of $480 million a quarter. So you obviously are not going to do that this year and next year. That's not going to happen. So that implies to me like $1.8 billion to $2 billion of revenue. You'd probably do $1.48 billion this year. So I'm just trying to understand what the new revenue profile is going to look like and what the new gross margin profile is going to look like going forward.

Stephen Cumming

Yes, I mean, Raj, I'm not going to put any sort of growth expectations for 2013 at this point in time. I think it will be crazy to do something like that given the macro concerns. We're coming out of recovery, we've seen sequential growth, we've got a lot of new product ramping with Windows 8 so we do expect the outlook with our core Micro business and Touch business to grow over the longer term. But I'm not going to put that revenue number or growth expectations for 2013 at this point.

Operator

Your next question comes from the line of Anthony Stoss of Craig-Hallum.

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

You commented about you expect your Q4 touch revenue to be up sequentially. Can you comment about your non-Touch MC business in Q4? And also, if you won't mind giving us the percent of Touch revenues that were tablets versus smartphones?

Steven A. Laub

With respect to the sort of non-Touch MC business, I think it's probably too early to give a forecast for Q4. A lot is being driven by generally what's happening in the marketplace. I can tell you with high confidence that the industrial marketplaces are recovering in Q4. We would expect that that business to be up in Q4 as well. As I mentioned earlier in this call, our expectation has been to have quite strong growth and a snapback in the MC [ph] business and we did see that actually in that business occurring in Q2 with a double-digit growth. But they were seeing also some softening occurring now in Q3 in industrial and that really is, by far, the largest end market for that particular business. So my expectation is we actually probably will be up low single digits, is my expectation but we have to confirm that in our next conference call. With respect to the -- so what's the question, the mix of business...

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Tablets versus smartphones.

Steven A. Laub

What we saw in the -- for ourselves, this is for last quarter you're asking?

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Yes.

Steven A. Laub

Was that for smartphones, it's, looking at some ranges, between 55% and 65%; tablets between sort of 25% to 35%; and other 10% to 15%.

Peter Schuman

Do you have a follow up, Tony? We'll take one more caller if you don't.

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

One more quickly, Steve. Is price or performance more important now in the handset side?

Steven A. Laub

It depends on which part of the marketplace.

Operator

Your final question comes from the line of David Blue with Andaba Global Research.

Unknown Analyst

Can you talk about the bookings patent during the second quarter, how linear the quarter was and what's the first part of July look like? And what is the -- you talked about some restructuring in Europe and the U.S. But which functions would those be configured in?

Stephen Cumming

So overall booking activity in general for Q2 was solid. We had started to see some softening towards the latter part of the quarter and into July. As Steve said earlier, our largest market industrial, we're starting to see some weaknesses there. So that's materializing. With regards to the restructuring activity, it was in Europe and U.S. and the functions are covering both overall manufacturing and SG&A, and in some cases, R&D.

Operator

That does conclude our questions-and-answers session for today. I'll hand the program back over to Mr. Peter Schuman.

Peter Schuman

Thank you, Christy. During the third quarter, Atmel will be presenting in Vail, Colorado at the Pacific Crest Global Technology Leadership Forum on Monday, August 13, and in Boston at the Canaccord Genuity Growth Conference on Wednesday, August 15. In September, we will present in London at the Raymond James Americas Select Conference, Tuesday, September 11 as well as the Thinkequity Growth Conference in New York on September 13. Webcast information for these events will be available on our Investor Relations website. In the meantime, you're always welcome to contact our Investor Relations department at (408) 437-2026 with any questions that arise. Thank you for joining us and this concludes today's call.

Operator

You may now disconnect.

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